Latin American Debt Crisis

The Latin America debt crisis occurred during the 1980s when many Latin American economies reached a stage where their foreign debt exceeded their earning power, leaving them unable to repay their debts. Due to the catastrophic effects of this crisis, it is also referred to as the “lost decade”.

Brazil, Argentina and Mexico, and others, all borrowed heavily between the 1960s-1970s when they began to implement their ‘import substitution industrialisation’ policies. Banks saw these economies as safe bets at the time because they were all growing. Latin American countries borrowed from the World Bank and, dangerously, from private commercial banks who had just received an influx of money from oil rich economies. Perhaps most dangerously, most of the debts undertaken were short-term and had to be repaid in the near future.

Between 1975-1982, Latin America’s foreign debt quadrupled from $75 billion to $315 billion. This was half of the region’s GDP. Debt service (the interest repayments on loans) rose extremely quickly from $12 billion in 1975 to $66 billion in 1982 due to the surge in global interest rates.

At the same time, fatefully, Latin America suffered problems with their export revenues because world trade was collapsing and because their exchange rate was deteriorating as a result of their governments owing such large amounts of their national currencies to foreign investors. Additionally, oil prices were rising, and Latin America were net importers of oil, causing their imports to become more expensive.

The crisis then kicked in during August 1982 when Mexico announced that they would default on their foreign debt. This created a domino effect as private banks stopped lending to Latin America. Because no one wanted to lend to Latin America, and since most of the debt was made up of short-term loans, billions of dollars worth of loans, which could otherwise have been refinanced, were due immediately.

Latin American economies, unable to repay their debts, turned to the IMF. In return for lending them money, the IMF forced Latin America to leave their import-substitution industrialisation plans and, instead, push through free-market reforms and engage in a serious bout of austerity to cut total government spending. This back-fired terribly as the reduction in government spending halted the industrialisation process, increased unemployment, decreased wages and increased inequality. Consequently, during the 1980s, the entire continent suffered a per capita growth rate of almost 0%, whereas in previous decades it was consistently above 4%. The citizens of Latin America suffered from lower living standards and, consequently, they turned against the IMF ‘outsiders’. Brazil claimed that they would “never again sign agreements with the IMF”.